When thinking about how much life insurance you need, the best place to start is with the thought “If I die tomorrow” Although most of us do not want to think about it that way, it is a good starting point. Today we are going to talk about what factors to consider when starting a life insurance policy, and how to calculate how much you will need.
Let’s start with how much you owe on your mortgage.
This is extremely important for anyone that is looking at life insurance policies. If you pass away, can your family still afford to pay that payment each month? Especially with the loss of your income as well? If you own more than one home, you can factor in those as well, but first and foremost focus on the primary residence, as this is where your family resides.
How much debt do you have?
Upon your passing your bills do not go away. If you are married your spouse could be left with those bills. Think about credit cards, car loans, mortgage, any other personal loans should all be factored into your life insurance.
Next, think about the loss of income mentioned earlier.
Does your spouse work? Does your spouse make enough money to pay all the bills without your income? Will they be comfortable, or will they struggle to make ends meet each month? To figure this total you will need to consider how many years you have left until retirement. If you are 36 years old and plan to retire at 65, you will need to account for 29 years of income. If you are in school or planning a big promotion, you can factor in your expected income amount once graduated or the promotion begins. It is always better to be over insured, so don’t worry if this change isn’t coming immediately.
Do you have children? Do those children want to go to college? Are they too young to decide that?
It is probably better to assume that they are going to attend a four-year university. Again it is better to be over insured. You will want to factor in the total amount of a four-year university, per child, in your total amount of life insurance. The average cost for a four-year college in 2022 is approximately $22,000 a year and a private university is approximately $50,000 a year. This cost will increase over the years; however, this will still be beneficial to your child(ren) in the event of your passing. They would only need to pay a few thousand dollars vs anywhere from 20 to 50 thousand dollars a year.
Finally, final expenses should be factored into your total amount of life insurance.
The typical funeral costs between $20,000 and $30,000. This covers caskets, flowers, officiant, funeral home fees, burial site etc. You can figure this out by planning your funeral. It sounds weird to plan your own funeral, doesn’t it? This will help you determine exactly what you want. Do you want the cheapest casket and quickest one day funeral? Or would you like it spread over a few days, with a top of line casket, or maybe a vault?
Sample of a life insurance calculation:
Mortgage – $156,000
Debt – $43,000
Income Loss – $1,740,000 (If you make $60,000 a year and have 29 years left to retirement)
College – 400,000 (If you have two children and plan for a 4-year private college)
Funeral Expenses – $20,000
Total Expenses – $2,321,043.00
Using these calculations, you would need approximately $2,321,000 in life insurance coverage. Remember as discussed in previous weeks, the younger and healthier you are when you begin a policy, the cheaper the monthly premium will be.